Given their high interest rates, why do so many people continue to borrow money on credit cards? According to Sha Yang and colleagues, part of the answer has to do with people being unrealistically optimistic about paying off their balance each month.

Two hundred and seventy-one credit card users were surveyed repeatedly about the cards they used, their intention to pay off their monthly balances, and what their actual credit balances were.

From a pragmatic perspective, people who allow debt to accumulate on a card would be better off using a card with a cheap interest rate, even if the annual fee were large. However, the researchers found that people who said they intended to pay off their balance, but didn’t, were more likely to use cards with higher interest rates, and less likely to use cards with a higher (one-off) annual fee.

The researchers said: “These findings show that people who are more subject to unrealistic optimism will be more prone to select cards that do not serve their interests”.

A second study involved 75 participants who made hypothetical choices between rival credit cards and also completed a questionnaire that revealed their propensity for wishful thinking. Consistent with the first study, people prone to wishful thinking were less bothered by a high interest rate, but more concerned with a avoiding a higher annual fee.

“We show that unrealistic optimism may be one of the psychological explanations underlying why some consumers prefer credit cards with features that are not in their best interest, which has long been a puzzle for both researchers and credit card marketers”, the researchers said, adding that public policy may be needed to protect such people._________________________________